Accounts Receivable Aging

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What is 'Accounts Receivable Aging'

Accounts receivable aging is a periodic report that categorizes a company's accounts receivable according to the length of time an invoice has been outstanding. It is used as a gauge to determine the financial health of a company's customers. If an accounts receivable aging demonstrates that a company's receivables are being collected much slower than normal, this is a warning sign that business may be slowing down or that the company is taking greater credit risk in its sales practices.

BREAKING DOWN 'Accounts Receivable Aging'

As a management tool, accounts receivable aging may indicate that certain customers are not good credit risks, and may reveal whether the company should keep doing business with customers that are chronically late payers.

Accounts receivable aging is typically broken into date ranges of 30 days. The report typically reports total receivables that are currently due, as well as receivables that are past due.

Aging of Accounts Receivable Table

A table depicting accounts receivable aging provides details of specific receivables based on age. The specific receivables are aggregated at the bottom of the table to display the total receivables of a company, based on the number of days the invoice is past due. The typical column headers of an accounts receivable aging table include the customer name, total receivables of that customer, and various date ranges. Each row represents the total receivables of a single customer.

Allowance for Doubtful Accounts

Accounts receivable aging is useful in determining the allowance for doubtful accounts. When estimating the amount of bad debt to report on a company’s financial statements, the accounts receivable aging report is useful to estimate the total amount to be written off. The primary useful feature is the aggregation of receivables based on the length the invoice has been past due. A company applies a fixed rate of default to each date range. Invoices that have been outstanding for longer periods of time are given a higher default rate due to the higher likelihood of default. The sum of the products from each outstanding date range provides an estimate regarding the amount of uncollectable receivables.

Benefits and Improving Accounts Receivable Aging

The findings from accounts receivable aging reports may be improved in various ways. First, account receivables are derivations from the extension of credit. If a company experiences difficulty collecting accounts, as evidenced by the accounts receivable aging report, specific customers may be extended business on a cash-only basis. Therefore, the aging report is useful in the determination of business practices. Also, accounts receivable aging reports mailed to customers along with the month-end statement provides a detailed account of outstanding items. Therefore, an accounts receivable aging report may be utilized by internal as well as external individuals.